Brexit boilover; It's all coming to a head

NZ Funds principal David van Schaardenburg looks at Brexit and what it means for people with UK Pensions.

Thursday, December 6th 2018, 8:10AM

by David van Schaardenburg

Mark this date in your diary. 7pm 11 December GMT.

It is the date and time that the UK Parliament will vote to approve (or not) the Brexit agreement already agreed between the UK Government and European Union (EU) leaders on November 25. This vote will occur after Parliament has had five full days to debate the government motion to approve the EU withdrawal agreement and accompanying political declaration. This motion is allowed to have up to six amendments before having a ‘meaningful vote’.

However, based on stated views of many Government MPs, there seems minimal likelihood the motion will be approved.

With a ‘no deal Brexit’ a clear possibility (and using British historical analogies) the key question in my mind is;

‘Will Brexit be akin to the evacuation from Dunkirk – a triumph in the midst of a dramatic defeat that ensured Britain could fight on, or will it be like the fall of Singapore - a calamitous disaster that had an irreversible and materially negative impact on the British Empire?’

On November 29 the Bank of England (BOE) Governor Mark Carney made his views clear that from an economic perspective it’s a ‘fall of Singapore’ scenario!

In the scenario of a no deal Brexit, the BOE has forecast UK GDP to be 11% smaller within five years than it would be otherwise. It also sees the UK pound collapse versus the US dollar to below parity (22% below where it is now). A worst-case scenario sees the UK economy contract by 8% within a year and property prices falling by up to a third.

While this appears extreme, these forecasts are from an independent central bank with extensive economic analysis expertise making it clear what a worst-case situation might entail for the UK.

For investors from outside the UK who have exposure to the UK pound and to the UK economy, such as through their UK pension, it’s seems likely it’s going to be a nerve wracking next few months. First is the risk of value decline in the UK shares in their pension portfolio as prices readjust to a lower economic growth rate; second the loss of value in Sterling versus the currency of their country of residence (such as the NZ dollar).

While an optimist would look for the light at the end of this process, one can expect not only near-term volatility in the value of pension savings but also uncertainty about how the rules of UK pension transfer may change through the Brexit process.

In both historical analogies above, the fortunate ones were those who either chose to get on the boat earlier or were lucky enough to be evacuated in time and in doing so, depart for safer shores.

We anticipate many international investors will prefer to leave the uncertainty of Brexit behind and move their savings, such as their pension, out of the UK.